JKM comes of age
Exchange traded contracts settling against the Platts’ Asian LNG marker are on the rise
The key east Asian oil demand markets do not have a delivered ex-ship (Des) benchmark, the nearest being a Dubai free-on-board (Fob) price that trades relative to Brent. But some are hailing that the global LNG market, despite its relative immaturity compared to crude, does now have its Asian reference price, due to the rise in activity on Ice Japan/Korean Marker (JKM) futures.
The exchanged-traded contracts, which settle against the JKM price produced by price reporting agency S&P Global Platts, have clearly seen impressive growth. Traded lots in 2018 increased by almost 240pc to more than 165,000, while open interest at the end of February topped 30,000 lots, compared to less than 12,000 on February's 2018's final trading day. A smaller volume of JKM futures also trades on the CME.
JKM "probably is" the Asian LNG benchmark price for now, says independent gas market consultant Patrick Heather, but he cautions that he is "not sure if it necessarily remains so". "Generally speaking, first movers are the ones that gain traction. Once you are established, you are established, it is very difficult to change a benchmark," he says.
So why does a doubt remain? Heather's main concern is that the JKM price that underlies the Ice futures is what he calls a "price assessment, not a traded price".
Platts' market-on-close (MoC) trading window for JKM, where traders can buy and sell cargoes bound not just for Japan and South Korea but also China and Taiwan, had seen only 16 trades by late February, so most days the price is set not based on deals done but Platts' judgement on where market value lies. This is in sharp contrast to other global gas benchmarks, such the US Henry Hub and Europe's NBP and TTF markets. Even if there is PRA involvement in some of the prices used, these benchmarks are all underpinned by substantial trading volume, and price levels are highly transparent.
Effectively measuring gas market liquidity can be notoriously tricky. But in a March paper for the Oxford Institute for Energy Studies (OIES), Heather and his OIES colleague Thierry Bros attempt to tackle the churn factor-the average number of times a gas molecule changes hand calculated by trading volume divided by physical delivery-for Henry Hub, TTF and JKM.
For Henry Hub, the calculation is a relatively easy division of Nymex Henry Hub activity by US production and imports, giving a churn factor for 2018 of 53.9. Any market with a churn of 50+ should be classified as very liquid.
TTF is less straightforward as, while the market is based solely on the Dutch gas grid, its traded activity is undertaken not solely by Dutch-focused players. Bros and Heather see TTF price indexation across the Netherlands, Belgium, France, Germany, Austria and the Czech Republic, so divide reported over-the-counter (OTC) TTF trade plus activity across two exchanges by demand across these six countries. That gives 2018 churn of 16.7 for TTF, just enough to cross the 15 threshold, signalling a liquid market.
For JKM, the equation is to divide the 38.7mn t of JKM traded futures on Ice and CME by the 195mn t LNG import requirements of the four receiving countries. To reinforce Heather's liquidity concerns, the churn factor comes out at 0.2.
Thus, while it is "encouraging" that JKM is being used not only to price contracts, but also in risk management, Heather is looking towards the Chinese market as a potential longer-term solution for Asian LNG benchmarking. Henry Hub and TTF are pipeline markets where diverse sources of gas supply meet strong demand in a way that encourages a high volume of trading and robust price discovery. China is surpassing Japan to be east Asia's largest demand centre, has large domestic production and various sources of imports, both pipeline and LNG- in short, all the physical requirements for a liquid hub.
China's efforts to establish benchmarks in oil and other key commodities such as coal, iron ore and steel have been largely unsuccessful. Concerns over potential government influence, especially if prices move in a direction unfavourable to China, a dominance of local traders and speculation over international players with genuine physical and financial risk management requirements, plus an insistence in yuan-denominated contracts, have all stymied progress.
But, "if China can get it right, and can encourage foreign traders in", a venue such as the Shanghai Exchange, in a free-trade zone, could develop a gas contract with the potential to be the Henry Hub or TTF of Asia, says Heather.